Croatia eyes benefits in being EU’s 28th member

Balkan nation signs EU accession treaty in Brussels on Friday

By

ClareHutchison

LONDON (MarketWatch) –– Croatia is set to become the 28th member state of the European Union in a landmark achievement for the former Yugoslav republic, but one that comes at a time of unprecedented turmoil within the economic and political bloc.

Eight years after it first applied for membership, Croatia signed an EU accession treaty on Friday at a ceremony in Brussels, where European leaders had scrambled overnight to reach agreement on closer fiscal ties among most member states.

Many in Croatia, a nation of 4.4 million famous for its beautiful Adriatic coastline and thriving tourism industry, see EU membership as a positive step for their political and economic future. However, with the sovereign debt crisis hanging over Europe and a sluggish economy of its own, Croatia’s transition into the EU may not produce a significant payoff.

ECB cuts interest rates to 1%

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The European Central Bank on Thursday returned its benchmark refinancing rate to a historic low of 1%, fully reversing its much-criticized increases earlier this year.

Zdeslav Santic, chief economist of Societe Generale Splitska Banka in the capital Zagreb, said the road to EU membership has initiated some important changes in the nation, but there is a lot more work to be done.

“EU accession is the only real scenario for Croatia that can produce economic benefits, but also stability,” Santic said.

“But I believe the Greek experience shows us best: the EU cannot solve your problems; you can enter the EU but you must deal with weaknesses in the economy and fiscal sector first,” he said.

Major political goal

Croatia first began developing political relations with the EU just one year after it declared itself an independent state in 1991. Since then connections between the Balkan state, which was ravaged by war in the early 1990s, and the EU have intensified and in February 2003, the country formally applied for membership.

Reuters

Croatian center-left party leader Zoran Milanovic.

Croatia is now scheduled to officially join the union in July 2013, but first it must hold a referendum on EU membership and have its membership ratified by the other member states.

A poll carried out for the Delegation of the European Union to the Republic of Croatia in September showed that 53% of the 1,000 Croatians surveyed would vote “yes” to EU membership in a referendum.

“This has been a major political goal in the last 20 years,” said Hrvoje Butkovic, a researcher at the Institute for International Relations in Zagreb.“The referendum [outcome] is most likely going to be positive.”

“We have some euro-skeptical citizens but no euro-skeptical political parties; in fact most are euro optimists, and nobody is expecting the referendum to fail,” he added.

In 2004, Croatia watched eight fellow Eastern European countries join the EU and reap the economic and political benefits that being a part of the world’s biggest trading bloc then offered. In 2007, two more countries from Eastern Europe, Bulgaria and Romania, joined the union.

Consequently, EU membership is seen in Croatia as a gateway to greater foreign investment and export growth, as well as political stability. But as the debt crisis roils the euro zone and the EU, it is unlikely that membership will bring Croatia gains on the same scale.

“The problem for Croatia is that unfortunately foreign investors don’t want to be in Europe,” said Timothy Ash, head of emerging markets at Royal Bank of Scotland Group. “In this instance, EU membership will not create massive positives as it could have done five years ago; it will be a slight marginal positive,” he said.

Economic woes

But the EU still holds promise for Croatians, probably because their country was hit especially hard by the global economic downturn and has struggled to recover ever since.

Data compiled by Capital Economics show that in 2010 Croatia’s gross domestic product contracted 1.2%. In 2011, it is expected to grow by just 0.5%, before dropping 1% next year. Analysts expect the Balkan state to slip back into recession early in 2012. Its unemployment rate is one of the highest in Europe, reaching 17.4% in October.

A boom in the last decade brought by massive capital inflows and foreign investment disguised a need for structural reforms to Croatia’s economy and when the financial crisis hit, the country was saddled with major problems, including inflexible labor markets, an over-sized public sector and an over-generous welfare and pension system, Ash said.

These issues were exacerbated by the recently ousted HDZ conservative government, which was reluctant to push through any radical reforms. The HDZ party was also mired in various corruption scandals, which damaged the country’s reputation in the eyes of investors.

A new government, the center-left Kukuriku coalition led by Zoran Milanovic, swept into power in the country’s parliamentary elections last week on the promise of economic reforms and crackdowns on corruption.

Neil Shearing, chief emerging-markets economist at Capital Economics, said EU membership could help the new government enact the necessary reforms to transform Croatia’s economy.

Describing EU membership as unequivocally positive for Croatia, Shearing said “the real benefit of the EU for Eastern Europe is that it has been shown to be an anchor for reforms.”

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